USD/JPY intermarket: Bulls Need Higher Adj in 10-y US-JP Spread
USD/JPY intermarket: Bulls Need Higher Adj in 10-y US-JP Spread
One week ago, a significant divergence
between the 10-year US-JP yield spread was identified, one which was
suggesting the possibility of the pair being too cheap based on its
yield valuations. Ever since, the pair has strengthened from 107.00
towards 109.50, before settling in a 108.50-109.50 balance area.
Risk appetite, Fed fund rates fuel the recovery
The rise in the USD/JPY has been led by a pick up in the Fed fund rate
(see XFFE contract in XETRA), together with a decrease in the VIX index
and strength in the Nikkei 225, exchanging hands above 16,500 from
16,100 or thereabouts 1 week ago. The correction lower in Gold has also
weighed on USD/JPY (the 20-day correlation coefficient is at its lowest
since early March, currently at -0.89), as the risk on environment
improved.
Misalignment in 10-year US-JP yield spread
At this stage, however, as the pair rises, it is worth noting that
despite an increase in the Fed fund rates, which represents a more
hawkish view in the Fed raising rates at least one time this year, the
move up has not been backed up by the 10-year US-JP yield spread, which
has moved quite sharply in favour of the Japanese Yen, mainly on US
10-year yield weakness. Should buyers expect higher prices, one of the
key themes for this week might be how the US bond yields perform, as it
would be hard to justify a breakout of the current 1 cent USD/JPY
balance area unless the US-JP yield spread starts to re-adjust into
higher territory, in line with the Fed fund rates.
